Working Paper: CEPR ID: DP10546
Authors: Alessandro Gavazza
Abstract: I estimate a search-and-bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business-aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2-percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. Moreover, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents' direct transactions.
Keywords: bargaining; intermediaries; search markets
JEL Codes: C78; D83; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trading frictions (F16) | Misallocations of assets (D61) |
| Trading frictions (F16) | Prices (D49) |
| Trading frictions (F16) | Aggregate welfare losses (D69) |
| Dealers (L81) | Trading frictions (F16) |
| Dealers (L81) | Welfare loss (D69) |
| Misallocations of assets (D61) | Aggregate welfare losses (D69) |